Mathios Refractories (ATH:MATHIO) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Mathios Refractories S.A. (ATH:MATHIO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mathios Refractories

How Much Debt Does Mathios Refractories Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Mathios Refractories had debt of €10.7m, up from €9.27m in one year. However, it does have €2.43m in cash offsetting this, leading to net debt of about €8.27m.

How Healthy Is Mathios Refractories' Balance Sheet?

The latest balance sheet data shows that Mathios Refractories had liabilities of €12.0m due within a year, and liabilities of €4.88m falling due after that. On the other hand, it had cash of €2.43m and €6.10m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.30m.

The deficiency here weighs heavily on the €4.91m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Mathios Refractories would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mathios Refractories will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Mathios Refractories had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to €13m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Mathios Refractories produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €739k. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €434k in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Mathios Refractories has 3 warning signs (and 2 which are potentially serious) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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